Papa Johns 2011 Annual Report Download - page 34

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resulted in the identification of new components in 2011. Additionally, because components meet the
aggregation provision of Accounting Standards Codification 280, “Segment Reporting,” we now
aggregate the components of our domestic Company-owned restaurant segment into one reporting unit.
Prior to 2011, the components were treated as individual reporting units.
Under ASU 2011-08, companies can bypass the qualitative assessment and move directly to the
quantitative assessment for any reporting unit in any period if management believes that it is more
efficient or there is a risk of impairment. All companies can elect to resume performing the qualitative
assessment in any subsequent period. We applied the qualitative assessment for our domestic Company-
owned restaurants and China reporting units, which is included in our international reporting segment. As
a result of our qualitative analysis, we determined that it was more-likely-than-not that the fair value of
our domestic Company-owned restaurants and China reporting units was greater than the carrying
amounts.
With respect to our PJUK reporting unit (which represents $14.8 million of goodwill as of December 25,
2011), we bypassed the qualitative assessment and performed the two-step quantitative goodwill
impairment test, which indicated the fair value exceeded the carrying amount by 7%. The fair value was
calculated using an income approach that projected net cash flow over a 10-year discrete period and a
terminal value, which were discounted using appropriate rates. The selected discount rate considers the
risk and nature of our PJUK reporting unit’s cash flow and the rates of return market participants would
require to invest their capital in the PJUK reporting unit. We believe our PJUK reporting unit will
continue to improve its operating results through ongoing growth initiatives, by increasing Papa John’s
brand awareness in the United Kingdom, improving sales and profitability for individual franchised
restaurants and increasing PJUK franchised net unit openings over the next several years. Future
impairment charges could be required if adverse economic events occur in the United Kingdom.
Subsequent to completing our annual qualitative and quantitative goodwill impairment tests, no
indications of impairment were identified.
Insurance Reserves
Our insurance programs for workers’ compensation, general liability, owned and non-owned automobiles
and health insurance coverage provided to our employees are self-insured up to certain individual and
aggregate reinsurance levels. Losses are accrued based upon undiscounted estimates of the aggregate
retained liability for claims incurred using certain third-party actuarial projections and our claims loss
experience. The estimated insurance claims losses could be significantly affected should the frequency or
ultimate cost of claims significantly differ from historical trends used to estimate the insurance reserves
recorded by the Company.
Deferred Income Tax Accounts and Tax Reserves
Papa John’s is subject to income taxes in the United States and several foreign jurisdictions. Significant
judgment is required in determining Papa John’s provision for income taxes and the related assets and
liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable and
those deferred. We use an estimated annual effective rate based on expected annual income to determine
our quarterly provision for income taxes. Discrete income tax items are recorded in the quarter in which
they occur.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax
basis of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in
effect when the differences reverse. Deferred tax assets are also recognized for the estimated future
effects of tax loss carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the